The U.S.-Israeli war on Iran is now in its third week and its impact on Gulf aluminium production and exports is accelerating disruption across an already fragmented physical supply chain.
Two Gulf smelters are curtailing capacity, and the continued closure of the Strait of Hormuz threatens more output cuts.
The Middle East accounts for around 9% of global aluminium production - a metal essential to construction, transport and renewable energy.
Remove China out of the equation and that ratio rises to over 20%. Take out Russia too - the reality for U.S. and European manufacturers under sanctions over its Ukraine invasion - and it rises higher still.
The impact is compounded by low inventories on the London Metal Exchange (LME), which are about to shrink a lot more as traders scramble for units.
PHYSICAL SHOCK
The immediate price shock from the Gulf crisis drove LME three-month aluminium to a four-year high of $3,545.50 per metric ton last week.
Now, the secondary shock is travelling down the physical supply chain.
Japanese buyers initially baulked when global producers offered a premium of up to $250 over the LME price for second-quarter deliveries, a 28% increase on first-quarter terms.
They are now snapping up a revised offer of $350 for what serves as a benchmark for other Asian buyers.
The premium for duty-paid aluminium in Europe has surged to $450 per ton over the LME cash price, its highest level since late 2022.
RISK ASSESSMENT
While LME traders are trying to price the risk posed by the Gulf crisis to the global aluminium market, manufacturers have no choice but to pay inflated premiums just to guarantee they have metal.
Aluminium Bahrain (ALBH.BH) and Qatalum, the Qatari smelter joint venture between Norsk Hydro (NHY.OL) and Qatar Aluminum Manufacturing (QAMC.QA) are powering down some 570,000 tons of annual production capacity between them.
Export shipments have ground to a halt due to the risks to shipping of passing through the Strait of Hormuz.
Emirates Global Aluminium, which is still operating at full capacity, is looking to re-route shipments via the port of Sohar in Oman, which may offer some limited mitigation.
But with no signs of de-escalation, the threat to supply is growing with each passing day because just as product can't get out, raw materials can't get in.
Only Saudi Arabia's Ma'aden smelter is fully integrated with its own bauxite mine and alumina refinery. How long raw materials stocks at the Gulf's other operators last is becoming an increasingly moot point.
DESPERATELY SEEKING SUPPLY
The problem for buyers of Gulf aluminium is that there aren't a lot of alternative sources of metal to plug the widening supply gap.
China is the world's largest producer, but the country's giant aluminium sector is geared towards exporting semi-manufactured products - bars, rods and tubes - rather than primary metal.
It's more competitor than saviour for Western manufacturers looking to source primary metal.
Moreover, China's smelter system has little spare capacity, running close to Beijing's mandated annual capacity cap of just over 45 million tons.
Russian supply has already pivoted to Asia in the wake of U.S. and European sanctions following the invasion of Ukraine in 2022.
Indeed, Russia has become a major supplier of primary aluminium to China as Chinese production growth grinds to a halt.
MARKET OF LAST RUSSIAN RESORT
Given these structural supply constraints, it's logical that traders have turned to the market of last resort to replace what is currently stuck the wrong side of the Strait of Hormuz.
Just over 150,000 tons of LME-warranted metal has been cancelled in preparation for physical load-out since the start of this month.
Stocks of Russian metal at the South Korean port of Gwangyang have been left largely untouched, meaning that a significant part of what remains in the LME storage system is now metal that many Western buyers can't or won't take.
Nor is there much metal left in LME off-warrant storage. These shadow stocks have been steadily draining away over the last year and at 108,000 tons are down by 52,000 tons since the start of 2026.
The squeeze is visible in time spreads. The benchmark cash-to-three-months spread has inverted from contango to backwardation, where spot supplies command a premium over future deliveries, a classic signal of acute near-term shortage.
But the current cash premium of $18 per ton is modest relative to physical market premiums, which provides little incentive for fresh deliveries from an already strained supply chain.
While the rise in oil and gas pricing has understandably grabbed the headlines since the start of the war in Iran, the risks to the aluminium market are equally acute.
Maybe even more so, since the Iran war is revealing just how dependent Western buyers have become on the Middle East's primary aluminium smelters.
(The opinions expressed here are those of Andy Home, a columnist for Reuters.)
Enjoying this column? Check out Reuters Open Interest (ROI) for thought-provoking, data-driven commentary on markets and finance. Follow ROI on LinkedIn and X.
And listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven days a week.
